The Wealth of Nations - Case Study Example

Swarna1 Word count: 3458 ID # 5448 Order 196571 d 9th December 2007 Discuss the Cartel case between British Airways and Virgin Atlantic Introduction Adam Smith in his famous book “The Wealth of Nations”, postulated that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. In other words, they finally target general customers for achieving their financial goals. Cartels come under one of these manipulative instruments. These conspirators are generally a group of formally independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels are prohibited by competition or antitrust laws in most countries; however, they continue to exist nationally and internationally, openly and secretly, formally and informally. The case of British Airways and Virgin Atlantic Cartel is one of the recent examples that is to be analyzed keeping the relevance of various competition acts in European Union. Analysis of existing competition laws related to present case In United Kingdom, the competition law of any agencies or companies is governed by the European union competition policy. The European Commission in this context, acts like national competition authorities except that it is responsible for Europe as a whole. The European Commission applies and enforces EU law. It can require companies to provide information and, if necessary, carry out surprise inspections in the offices of companies and, with a court order, in the homes of company personnel. The present case of British Airways come under perview of European commission competition laws. An overview of the case study and discuss the market structure of the industry. Some competition acts in England also helped in ensuring proper competition in the air market. The Competition Act 1998 (the Act) came into force on 1 March 2000 (David Strang and Toby Crick, 2001). The new Act replaces or amends the old Restrictive Trade Practices Act 1976 (RTPA), Resale Prices Act 1976 (RPA) and Competition Act 1980 and introduces a new system based on the European model. The Act also introduces a new and stricter enforcement regime that will provide the Office of Fair Trading (OFT) with wide ranging new powers. Fair Trading Act (1973) and Competition Act (1980) also play crucial role in ensuring fair competition among the companies and restricting unjustified acts of some companies and help in protecting the interests of genuine customers. Financial services and markets act (2000) and Enterprise act (2002) also serve as important legal instruments for interpretation of competition law in United Kingdom. Low-cost airlines have been able to start operating and developing in Europe thanks to the European Commission opening up the airline industry to competition. The wider and more affordable range of services now available are enjoyed by many European consumers (Air transport portal of the European commission. 2007). In spite of presence of several competition acts, still there has been remarkable exploitation of customers in the name of cartels or mergers. This is clearly witnessed in case of cartel-busting, in which the U.K. Office of Fair Trading imposed a record £121 million fine on British Airways for price fixing. During the investigation, British Airways admitted to fixing rates for air cargo shipments between March 2002 and February 2006, and co-ordinating fuel surcharges with another airline, Virgin Atlantic, between August 2004 and January 2006. During that period, the surcharges rose from £5 to £60 per ticket for British Airways and Virgin Atlantic long-haul flights. Similarly, in the U.S., British Airways was fined almost $550 million for fixing prices on fuel surcharges, with the U.S. Department of Justice compounding the U.K.’s £121.5 million ($249 million) fine with a separate $300 million criminal penalty. The British penalty is the highest fine ever imposed by the Office of Fair Trading. Arguments of the accusation (prosecution) – why have the firms been challenged? The cartel between the British Airways and Virgin Atlantic was very much challeneged by two high level authorities. Both European Commission and US Department of Justice accused both the firms of cartel for the price fixing scandal at British Airways. European Commission never encourages dual pricing policy that affects the interests of the consumers. For example, earlier, European commission has decided to prohibit the dual pricing system which Glaxo Wellcome (GW) had introduced for all its pharmaceutical products in Spain (Europa, 2001). GW had notified this system to the Commission for clearance in 1998. Under the dual pricing system, GW requires its Spanish wholesalers to pay a higher price for products which they export to other Member States than the price which they pay when reselling the same products for consumption on the domestic market. This system aims to reduce parallel trade within the Single Market. In the Commissions view, the system interferes with the Communitys objective of integrating national markets and restricts price competition for GW products. The Commission also concluded that the dual pricing system cannot be justified on economic grounds. Similarly, the commission accused price fixing case of British Airways along with Virgin Atlantic. At the same time, the US department of justice opened criminal investigations into senior staff at the airline. BA has formalised its guilty plea to fixing fuel surcharges on long-haul passenger and cargo flights in a court appearance in Washington in 2007. It is understood that the DoJ also named airline staff who face criminal investigation under anti-cartel laws. BA was fined £270m by authorities on both sides of the Atlantic after admitting the surcharge scam, which included a long-running conspiracy with Virgin Atlantic over passenger flights.The main argument of the two agencies i.e. European Commission and US Department of Justice is that the customers or passengers were cheated by hiking the sir charge fares by forming a cartel. The DoJ has condemned the surcharge fixing, saying that "virtually every American business and consumer was impacted by these crimes". It is believed to be focusing on the cargo scam, which involved several airlines and is still being investigated by competition authorities in Brussels. Even the passengers have initiated a multi-million dollar class action lawsuit over the cartel. No doubt, it was caused by the "anti-competitive conduct of a very limited number of individuals". The price fixing of passenger surcharges was initiated by BA, by making a phone call to Virgin counterparts on August 9 2004. However, US litigators have prepared to file a class action lawsuit against BA and Virgin Atlantic in the UK. The British consumers have the opportunity to recover that which was robbed from them through the consumer group, Which is also considering taking legal action. The OFTs investigation was also conducted in parallel with a similar case brought by the United States Department of Justice (DoJ). The investigations by the OFT and DoJ were separate but the two agencies have consulted each other closely throughout. In addition to the investigation into British Airways corporate conduct under civil competition law, the OFT is also conducting a criminal investigation into whether any individuals dishonestly fixed the levels of the surcharges - an offence under the Enterprise Act. The arguments firms (defendants) have given to pursue their conduct. A tip off by Virgin Atlantic Airways triggered an investigation into alleged airfare price-fixing by British Airways after it passed on information to Britains Office of Fair Trading (OFT) about its arch rival. Richard Bransons Virgin approached the OFT about alleged conversations between a BA executive and one of its staff last year to sound out plans to increase fuel surcharges on long-haul flights. UK and U.S. authorities this week launched a civil and criminal probe into an alleged cartel over airfares and fuel surcharges after raiding BAs offices. Virgins tip off underscores long-time rivalry between the two airlines which peaked in 1993 when Branson accused BA of waging a "dirty tricks" campaign against Virgin. The British Airways defended that it was the old rivalry with Virgin Atlanta that led to present crisis. It mentioned the earlier incident i.e. Virgin, which is 51 percent owned by Branson and 49 percent by Singapore Airlines, took BA to the High Court in 1993 alleging misuse of its computerised passenger data. Of course, the case was settled out of court. It explains that the price fixing of long-haul fuel surcharges - a levy placed on tickets to cover the rising cost of oil - between BA and Virgin Atlantic lasted from August 2004 to January 2006 and ended after Virgin Atlantic blew the whistle on its competitor. Had BA contacted competition authorities first, Virgin Atlantic would have faced record fines and criminal investigations of its staff.Though BA admitted its mistake of price fixing in fuel sir charges, it defended its stand by expressing the view that the price fixing was resulted due to some specific employees and it has taken action against them and hence the total firm should not be made guilty. BA suspended its Commercial Director Martin George, one of the airlines top executives who was responsible for announcing the increases in the airlines fuel surcharges. It also suspended its Head of Communications Iain Burns who reports directly to George. Virgin Atlantic, which has apologised for its role in the cartel, will be sued in civil lawsuits related to the case. It was given immunity from criminal prosecution after it was the first to report the illicit talks with BA (Dan Milmo, 2007). The final decision of the Court British Airways accepts the OFTs finding that on at least six occasions the two companies discussed and/or informed each other about proposed changes to the level of the surcharges, rather than setting levels independently as required under clear and well-established competition law principles. As British Airways has admitted collusion over the price of long-haul passenger fuel surcharges and will pay a penalty of £121.5m to be imposed by the OFT, thus enabling the OFT to close its civil investigation and resolve this case. The penalty will be the highest ever imposed by the OFT for infringements of competition law, and demonstrates the determination of the OFT to deal vigorously with anti-competitive behaviour. British Airways has admitted that between August 2004 and January 2006, it colluded with Virgin Atlantic over the surcharges which were added to ticket prices in response to rising oil prices. Over that period, the surcharges rose from £5 to £60 per ticket for a typical BA or Virgin Atlantic long-haul return flight. Fuel surcharges, when set independently, do not infringe competition law. Such surcharges were first introduced by each of BA and Virgin Airways in May 2004. The earliest evidence of collusion between the companies dates from August 2004 (Office of Fair Trade, 2007). As mentioned earlier, Virgin Atlantic is not expected to pay any penalty as it qualifies in principle for full immunity under the OFTs leniency policy. Under this policy, a company which has been involved in cartel conduct and which is the first to give full details about it to the OFT will qualify for immunity from penalties in relation to that conduct. In addition, any company staff involved in the price fixing disclosed will qualify for immunity from criminal prosecution in relation to that conduct. The OFTs investigation was prompted after Virgin Atlantic came forward with information about price fixing with BA over the surcharges. British Airways has also provided full co-operation with the OFTs investigation under the leniency programme and this is reflected in the penalty announced today. Critically assess that decision in the light of the theory of Industrial Organisation The decision of imposing heavy fine on the British Airways is highly relevant in the context of competition law. If the European Commission finds evidence of illegal business practices which restrict competition, it can act to prohibit such behaviour. It can also fine companies up to 10 % of their annual turnover if the companies have, for example, participated in a cartel that fixed prices or agreed how to share out the market between them. Accordingly, the punishment was imposed on BA. Moreover, the main purpose of competition Policy under European Union is to basically apply rules to make sure that companies compete with each other in a healthy manner. It is also aimed at ensuring the proper selling of their products, innovate and offer good prices to consumers. The main intention of the successful implementation of competition policy or law is to safeguard the customers and to prevent the manipulation among the companies for controlling the market under their umbrella in the name of monopoly (C. L. Pass and J. R. Sparkes, 2000). In other words, the risk if theres no competition policy is that companies will do deals with each other to split up the market between them, or will act in a way, which doesnt allow competitors on to the market. As a result, the consumers are denied access to innovative products and pay higher prices. By formation of cartels and manipulative policies like price fixing, the BA clearly violated the norms of competition law and hence the punishment is highly justified. Several investigators reported the way of functioning of competition law of European Union, which governs the competition aspects of various agencies or companies working in air ways in England. Similarly, the Competition Act 1998 prohibits agreements, practices and conduct that may have a damaging effect on competition in the UK. The present case is a clear example of its violation. The Chapter I prohibition covers anti-competitive agreements and concerted practices, that have the object or effect of preventing, restricting or distorting competition in the UK (or a part thereof). Its European counterpart, Article 81 of the EC Treaty, covers equivalent agreements or practices which affect trade between EU Member States. Hence, the recent case of cartel between British Airways and Virgin Atlantic exposed the manipulation of competition act at larger level for exploiting the customers.  The history reveals that European Commission has always taken stringent measures to protect the interests of the consumers. For example, the European Commission has decided to impose a fine of €49.5million on Automobiles Peugeot SA and Peugeot Nederland N.V., for having obstructed between 1997 and 2003 exports of new cars from The Netherlands to consumers living in other Member States (Europa, 2005). By preventing these exports of new cars, the companies committed a very serious violation the EC Treaty’s ban on restrictive business practices (Article 81). Similarly, the monopoly of any bigger company may jeopardize the interests of the customers as it can lead to unfair competition and excessive prices of commodities (Adam Smith, 1776.) which has happened in case of cartel between BA and virgin Atlantic. It was also argued that in this context, Article 82 of the EC Treaty (abuse of dominant position) was violated. The Article 82 of EC Treaty protects smaller companies from manipulation of bigger companies and in that process, safeguards the interests of the customers, but it was obstructed by the price fixing scandal of the cartel between BA and Virgin Atlantic. Similarly, European Commission always protected the interests of the customers from manipulative practices like price escalation mergers or cartels of several companies. For example, In case of France Telecom SA v. Commission, a broadband internet company was forced to pay €10.35 million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors and was being crossed subsidised to capture the lions share of a booming market (France Telecom SA v. Commission,2007). The European Commission or a national competition authority can prohibit an abuse and fine the off ending company. Some times, the merger of two or more companies may be intentionally targeted to restrict the terms of fair trade and hence the community law on merger control (Regulation (EC) No 139/2004) provides safeguard in this context (Gencor Ltd v. Commission, 1999). While companies combining forces (referred to below as mergers) can expand markets and bring benefits to the consumer, some combinations may reduce competition and harm consumers. In 2004, the European Commission intervened when the French and German gas companies Gaz de France and Ruhrgas allegedly refused to allow the Norwegian gas producer Marathon access to their gas networks. Both the French and the German companies subsequently offered to improve access to their respective networks, allowing customers in France and Germany to benefit more effectively in future from the opening of the gas markets to competition (Europa, 2004). Two large mergers in the pharmaceutical sector were notified to the European Commission: Sanofi / Synthélabo and Pfizer/Pharmacia (Pfizer v Pharmacia, 2003). The European Commission concluded that both mergers could have an adverse impact on competition, limiting the choice of certain drugs available to patients. In both cases, the parties proposed transferring some of their products to competitors, which the European Commission agreed would restore competition in the markets and so protect the interests of patients. Similar treatment was given by the European Commission in the cartel case between BA and Virgin Atlantic which is praiseworthy. In the present case, the OFT confirmed its investigation into price coordination in relation to long haul passenger flights to and from the UK on 22 June 2006. The OFTs investigation was conducted under the Competition Act 1998 which gives the OFT the power to impose penalties on companies of up to 10 per cent of their worldwide turnover for price fixing and other forms of anti-competitive behaviour. At the same time, the present case comes under violation of the Enterprise act of 2002. The Enterprise Act 2002 prohibits price-fixing and other cartel agreements made dishonestly by individuals. The facts and matters requiring to be proved are substantially different between the civil and criminal competition law regimes. However the defence stand taken by the Virgin Atlanta is also relevant under the OFTs leniency policy which states that an undertaking may be granted immunity from penalties or a significant reduction in penalty in return for reporting certain categories of Competition Act infringement and assisting the OFT with its investigation. Hence, Virgin Atlantic is expected to be granted immunity from penalties as it informed the OFT of the infringement before the OFT had commenced its investigation. Lastly, there are some genuine difficulties for Asian passengers as seeking legal representation in the U.K. would need coordination and will be expensive (Bharat Jairaj, 2007). Hence their interests should be well protected by both European Commission and US Department of Justice by taking the help of consumer associations (Telegraph.co.uk. 2007). Conclusion The European Commission Competition law has been highly effective in restricting the monopoly and dominance of some bigger companies and provides tremendous benefit to large number of small companies and in that process ensure customers to get an access to quality goods. However, the price fixing case of cartel between the British Airways and Virgin Atlantic sent the signals that the present competition acts of European Commission and other national and international agencies must be further strengthened. The encouraging aspect of this case is that the higher amount of fine imposed by both European Commission and US Department of Justice would certainly work as effective step because several companies wouldn’t dare to commit price fixations, References Adam Smith. (1776). An Inquiry into the Nature And Causes of the Wealth of Nations. Book I, Chapter 7, para 26. Bharat Jairaj. (2007). Consumers v Cartels. Metroplus Chennai. The Hindu dated 10th September 2007. Competition Act. (1980). Office of public sector information.http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_1.htm. Dan Milmo. (2007). Top BA staff criminal enquiry in price fixing case. Guardian. Dated 18th August 2007. David Strang and Toby Crick. (2001). The UK Competition Act 1998 and the IT Industry. Utilities Policy. 10 (3-4): 129-136. Enterprise Act. (2002). Office of public sector information. http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_1.htm. Europa. (2001). Commission prohibits Glaxo Wellcomes dual pricing system in Spain. IP/01/661. Europa. (2004). Commission settles Marathon case with Gaz de France and Ruhrgas. IP/04/573. Europa. (2005). Competition: Commission imposes a €49.5 million fine on Peugeot for obstructing new car exports from the Netherlands. IP/05/1227. Fair Trading Act. (1973). The UK statute law database. http://www.statutelaw.gov.uk/help/Help_for_the_Statute_Law_Database.htm. France Telecom SA v. Commission.(2007). Case T-340/03. JUDGMENT OF THE COURT OF FIRST INSTANCE (Fifth Chamber, Extended Composition) Dated 30 January 2007. Gencor Ltd v. Commission. (1999). T-102/96, ECR II-753. Office of Fair Trade. (2007). British Airways to pay record £121.5m penalty in price fixing investigation. Dated 1st August 2007. http://www.oft.gov.uk/news/press/2007/113-07. Pass, C. L. and Sparkes, J. R. (2000). U.K. competition policy evaluated. 16 (3) : 157-161. Pfizer v Pharmacia. (2003). Case M.2922. C265. DG 24.40. IP/03/293. Telegraph.co.uk. (2007). BA to Virgin: a fine mess you got us into. Dated 5th August 2007.http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/05/ccba105.xml. The Epoch Times. 2006. Virgin Tip Off Sparked British Airways Cartel Inquiry, Says Source. Dated 24th June 2006. http://en.epochtimes.com/news/6-6-24/43163.html. . Read More